RBNZ Wheeler nudges banks to pass benefits of rate cut to customers

Thursday 11th August 2016

Reserve Bank governor Graeme Wheeler says he expects lenders to pass on to their customers most of today's quarter-point cut to the official cash rate.

Wheeler lowered the OCR by 25 basis points to 2 percent, a record low, as he struggles to make the kiwi dollar a less attractive investment proposition and ease the currency's deflationary impact on the country. ANZ Bank New Zealand, the country's biggest lender, immediately cut its floating mortgage rate 5 basis points and rates for commercial, agri and business lending were reduced 15 basis points, while at the same time lifting some term deposits 30 basis points.

Wheeler said private banks have been competing more aggressively for home loans over the past couple of years, and since the RBNZ embarked on an easing cycle in June 2014, lenders have lowered two- and three-year fixed mortgages rates more than the OCR has been reduced.

"We would like to see most of it passed on," Wheeler told a briefing in Wellington. "It's up to the banks to work out what they want to do - lower lending rates or attract more deposits through higher deposit rates."

Credit growth has outstripped deposits for lenders, and as wholesale funding costs go up, banks will have to compete more aggressively for retail savings, he said.

Wheeler noted house prices were rising at an “excessive” pace, though new macro-prudential tools to limit riskier lending were seen as mitigating the threat to the financial system. He expects to meet Finance Minister Bill English in the next week or two seeking to have a debt-to-income ratio lever added to the RBNZ's memorandum of understanding with the government.

ANZ New Zealand chief executive David Hisco said he was supportive of the RBNZ's rate cut, but reducing mortgage rates would be "irresponsible" and only "throw fuel on the fire in an overheated housing market".

"We are sending a strong signal today to New Zealanders that at a time of record low interest rates, it is more responsible to pay down home loans and save than borrow more," Hisco said.

The central bank projects the household saving rate will remain negative in the 2017 March year at minus 0.1 percent of disposable income, before turning positive at 0.5 percent in 2018 and 0.7 percent the following year.

The August monetary policy statement said mortgage rates had been stable in recent months, and heightened competition for funding meant term deposits were elevated relative to their equivalent wholesale rates.

"For now, relative calm in markets has enabled banks to increase long-term wholesale funding," the central bank said. "However, if financial market volatility picks up again, bank funding costs could increase and limit the pass-through of OCR cuts to mortgage rates."

Wheeler said "no serious consideration" was given to cutting the benchmark rate by 50 basis points today, an outcome traders had priced in as an outside chance.

The kiwi jumped as high as 73.41 US cents after the monetary policy statement was released, from 72.02 cents immediately before, with traders disappointed Wheeler wasn’t as aggressive as he could’ve been. It was recently trading at 72.83 cents.

"It's always difficult to predict what the exchange rate reaction might be," Wheeler said.

He declined to comment on whether the Reserve Bank was intervening in the market or not.

BusinessDesk.co.nz

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